Netflix (NASDAQ:NFLX) last week raised the monthly fee for its most popular streaming subscription plan – boosting it from $9 to $10. The 11% increase was the second raise in just 18 months.
As recently as May of last year, new subscribers could buy the unlimited TV service for $8 a month. But Netflix's U.S. member base won't see a change until next year, since they're grandfathered in at the lower price.
Why mess with a good thing?
It's surprising that Netflix is tinkering with a formula that's been working so well for the business. The streaming-TV king added 3.3 million new subscribers last quarter, for double the growth pace of the prior year.
And low prices are a key driver behind those huge gains. In April, CEO Reed Hastings told investors that executives "couldn't be happier with the way [our pricing structure] creates an incredible value for consumers [and] feels fair to them." In July, he echoed those comments by calling the standard monthly price "incredibly affordable," and "part of what's propelling our growth."
So executives are gambling that $10 per month still constitutes a compelling value for their service -- good enough to keep membership growth chugging along. Here are three reasons they're right.
1. Access to exclusive shows and movies
Today's new subscribers are getting access to a completely different content portfolio from what Netflix was offering just a few years ago. As opposed to a wide catalog of licensed TV shows and movies (like an ad-supported cable channel has), a Netflix subscription is now more about exclusive, original content (like you'd get with an HBO subscription).
By the end of this year, Netflix will have released 300 hours of stuff that you can only find on its service, ranging from TV shows such as House of Cards to first-run movies such as this month's Beasts of No Nation.
Exclusivity should be enough to keep attracting members at a solid pace. Meanwhile, current subscribers who've been binging on new shows such as The Unbreakable Kimmey Schmidt and Sense8 will have plenty of reasons to re-up their subscriptions at the higher price point next year, as these series build momentum into their second and third seasons.
2. More expensive content
Using content spending as an approximation of the value of Netflix's service demonstrates just how much more bang for the buck new subscribers are getting these days. Hastings plans to shell out $5 billion on securing programming next year, up from about $4 billion in 2014.
In fact, Netflix is investing so aggressively in its cash-guzzling original content portfolio that it's had to resort to huge loans to help fund their production – to the tune of $1.5 billion earlier this year.
But executives are happy to pay more for the right TV shows and movies, the kind that have helped push viewing to over two hours per day for the average Netflix member. Because of rising engagement like that, a price increase shouldn't be a particularly hard sell.
3. Hit new-release movies
Still, it's probably not a coincidence that the price increase doesn't hit the bulk of Netflix's subscriber base until late next year. That's because members will probably be feeling good about their service after having recently watched a few blockbuster movies from Netflix's groundbreaking output deal with Disney (NYSE:DIS).
Beginning next year, Netflix is the exclusive streaming home of theatrical releases across the Disney movie empire, including Marvel, Disney Animation, and Pixar studios. Better yet, films from these creative giants will enter the service during the "Pay 1" window that's typically reserved for premium movie channels.
After queuing up one or two Disney hits just weeks after they've ended their blockbuster runs in theaters, my guess is that most Netflix members won't have any problem forking over an extra $1 per month for the service next year.